Why Collateral Warranties Ancillary To Construction Agreements Are Important For Property Owners and Developers

There will generally be multiple parties involved in any construction project, many of whom will have no contractual link with some or all of the parties in the design and build of the project.

Collateral Warranties are ancillary agreements to primary construction agreements e.g. Building Contracts, Sub-Contracts or Professional Team Appointments.

They are usually obtained by building owners or developers from Sub-Contractors and/or Consultants to a Main Contract in a development or redevelopment of a property. They may also be sought from the Main Contractor for the benefit of other entities e.g. a Lender, First Purchaser or Tenant.

A building owner or developer may enter into one single contract or building agreement with its main contractor for construction works to its property. The main contractor may and often will sub-contract many portions or packages under the contract to sub-contractors. However, this means that as there is no contract between the building owner or developer and the sub-contractor, there is no contractual nexus or link between the building owner or developer and sub-contractor, allowing the building owner or developer to sue for a breach of obligations of such sub-contractor.

A Collateral Warranty is a document which creates such a ‘link’ or ‘contractual nexus’ between the building owner or developer and sub-contractor or a purchaser or lender to the main contractor, who otherwise would have no contract with the sub-contractor.

In the event a sub-contractor does not carry out its obligations under the sub-contract, or breaches the terms of same, a building owner or sub-contractor can seek to recover directly from such sub-contractor. Equally a purchaser, lender or tenant can seek to recover against a main contractor under a collateral warranty, notwithstanding they were not party to the original Building Contract.

It is important, if possible, to ensure in the sub-contract or Deed of Appointment, that the contractor, sub-contractor or consultant is obliged to give collateral warranties to a Lender, Tenant and First Purchaser, as these entities will also not have a contractual nexus with the sub-contractors, main contractors or consultants.

Patrick F. O’Reilly & Co has years of experience working with development companies and offers specialist legal advice to property owners, property developers and building companies. Talk to Michael Crowley, Partner, Real Estate with any queries you have or to seek legal advice for your or your company and read more here about our Real Estate Legal Services and the projects we have worked on.

If you have any queries please do not hesitate to Contact Michael Crowley, Partner, Real Estate, Patrick F. O’Reilly & Co.